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BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON. D.C. 20268-0001
POSTAL RATE AND FEE CHANGES, 2000
RECEIVEL,
)
ERRATA TO DIRECT TESTIMONY OF DR. JOHN HALDI (VP/CW-T-1)
ON BEHALF OF VAL-PAK DIRECT MARKETING SYSTEMS, INC.,
VAL-PAK DEALERS’ ASSOCIATION, INC., AND
CAROL WRIGHT PROMOTIONS, INC. (ERRATUM)
(July 17, 2000)
The attachederrata provide corrections on several pagesof VP/CW-T-1, A list of the
corrections is attached, along with copies of the relevant pageswith the highlighted
Respectfully submitted,
John S.
WILLIAM J. OLSON, P.C.
8180 GreensboroDrive, Suite 1070
McLean, Virginia 22102-3860
(703)356-5070
Counsel for:
Val-Pak Direct Marketing Systems, Inc.,
Val-Pak Dealers’ Association, Inc., and
Carol Wright Promotions, Inc.
CERTIFICATE OF SERVICE
I hereby certify that I have this day servedby this document upon all participants of
record in this proceeding in accordancewith Section 12 of the Rules of Practice.
July 17, 2000
Corrections to Direct Testimony
of VPlCW Witness John Haldi (VPICW-T-1)
m
Line(s)
51
8
“-0.162” to “-0.570”
51
9
“0.162” to “0.570”
51
10
“much” to “somewhat”
51
10
“five” to “1.4”
51
12
“five” to “ 1.4”
51
14
“five” to “1.4”
Chanee
51
fn. 35
“p. 138” to “p. 111”
A-3
17-19
After “letters”, delete “ostensibly correspondsto the
volume of heavy-weight ECR letters in the Test Year
Before Rates, and”
A-4
2
After “Mail”, insert “The difference reflects (i) a change
in mail mix assumedby witness Moeller; and (ii) a
difference in letters as defined by the DMM and RPW
systems.”
A-4
2
After “constitute”, delete “such”
A-9
4
“1,o” to “1”
B-6
11
“randomly mixes” to “fails to isolate and analyze
separately”
B-6
12
After “most presorted mail”, insert “randomly mixes
weight-cost relationships and”
B-14
8
“mixed” to “non-single piece”
Revised 7/11/90
1
2. Rates influence
demand for mail products.
Prices send signals
2
to mailers; specifically, higher prices of a given product of mail will reduce
3
the volume of that product, and vice versa. As between different mail
4
products, the effect varies and can be quantified by the economists’ elasticity
5
measure, computed and presented by witness Tolley.
6
The elasticity of ECR Mail as reported by witness Tolley is -0.808; that
7
is, the volume of ECR falls by 0.808 percent whenever the ECR rate is
8
increased by 1 percents4 The elasticity of Regular Mail is ~~~~~~~” Thus, a 1
9
percent rise in the rate of Regular Mail reduces the volume by only ~~~~~
less than in the case of ECR. The demand for ECR is over $I#
10
percent, ~~~~~~
11
times more price-sensitive than that for Regular Mail. This means that the
12
same percentage rate increase will reduce ECR volume over i&g times more
13
than it would reduce Regular Mail volume. Conversely, the same percentage
14
rate reduction would expand ECR volume by over ###$times more than it
15
would expand Regular Mail volume.
16
The high elasticity of demand for Standard A ECR probably reflects a
17
number of factors, but above all, the ready availability
18
(criterion 5). Such alternatives include advertising in local newspapers,
19
shopping guides (which may be given out in stores or delivered by alternate
34
USPS-T-6, p. 129.
35
Id., p. @$
51
of alternatives
Revised 7/17/00
1
percent of the tallies between 3.0 to 3.5 ounces in weight, to estimate 73
2
tallies in the 3.3 to 3.5 ounce range.
3
The total tallies of letter-shaped pieces that are overweight (3.3 to 16
4
ounce) are obtained by adding the tallies in Row 5 to the tallies in the 3.5-16
5
ounce range, shown in Row 6, yielding a sum of 384 tallies (row 6). This
6
represents 2.589 percent of the total tallies of Standard A letter-shaped
7
pieces. This percentage can be applied to the total cost of Standard A ECR
8
letters by assuming that (i) the ECR subclass has the same proportion of
9
heavy-weight letters as all Standard A Mail, and (ii) the dollar weighted
10
11
costs of heavy-weight letters are in proportion to the raw tallies.
The above 2.589 percent adjustment appears rather conservative when
12
judged by other available data which are drawn from the ECR Subclass
13
alone. Witness Daniel (USPS-T-28) estimates that Standard A ECR Mail
14
will contain 13,127.962 million letters of all weights in Test Year Before
15
Rates, while witness Moeller estimates the volume of letters below the 3.3
16
ounce breakpoint to be 10,799.400 million.3’
17
witnesses Daniel and Moeller, 2,328.562 million letters ~:~~~~~~~~
I
PI.......
A.~.~.~.~...~...~.~......................,.~.~.
The difference between
18
19
31
See response to VP-CWKJSPS-1 (Response filed May 4,200O)
and witness Daniel response to ADVO/USPS-T28-1 (Tr. 4/1202).
A-3
Revised 7/11/00
1
2
3
7 times greater than the estimate developed here, based on IOCS tallies for
I ,~~ ,.,.
...,../,..
:;:~~:;.:.~
.,.,:
.,...............:
.,,,...,.
* ~,,,,,,.,,
aI1 Standard A Mail. :‘:.:i’:.-..:;:~~:iii-:.‘.~:~::::~:~~::~:?~~:;:~:::~~:::~~:.:~.~..
~~~~~~~~~~~~~~~~~~~~~~
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
If heavy-weight
I...
s.
I
1ettt.xs do indeed const$tute ~~
a
4
~~~~~~~~~
5
large share of all ECR mail that meets the DMM definition of letters, then (i)
6
volume data developed by the RPW System and costs developed by the IOCS
7
(which uses DMM definitions) are substantially
8
mismatch problem discussed in this testimony should be a matter of serious
9
concern. The Commission has repeatedly stressed it.9 desire to establish cost-
out of sync, and (ii) the
10
based rates. Sound cost data are a fundamental
11
cost-based rates successfully. 1t.aconcerns about the quality of Postal Service
12
cost data are well founded.
Cost adjustment.
13
prerequisite to implement
The procedure used here to adjust costs is shown
14
in Table A-2, rows l-10. The volumes of Standard A ECR letters and flats,
15
respectively, are shown in row 1, columns 1 and 3. The volume of letters and
16
flats, 13,127,961,721 and 20,455,078,077, respectively, correspond to the total
17
volumes used by witness Daniel. 38 Unit cost.3(total costs/volume) for letters
18
and flats, before any mismatch adjustments, are shown in Table A-2, row 2.
19
The unit cost of letters is 6.855 cents, and the unit cost of flats is 7.396 cents.
20
The unadjusted letter-flat
21
row 3.
38
difference amounts to 0.542 cents, as shown in
USPS-T-28 and USPS-LR-I-92.
A-4
Revised 7/17/00
1
Adjustment
2
for Letter-Shaped
Pieces With a DAL
The adjustment for letter-shaped
pieces entered with DALs is
4
presented in Table A-2, rows 11-19. In the absence of any volume data on
::j.j
DAL mailings, I estimate that $ percent of the total volume of Standard A
5
ECR flats consists of letter-shaped pieces with DALs that are classified by
6
the IOCS as letters. The number of these pieces, 204,440,781, is shown in
7
row 12. The same number of pieces, when expressed as a percentage of total
8
letter volume, is 1.588 percent, as shown in row 13.
3
9
Letter-shaped pieces with a DAL are not enveloped (if they were
10
enveloped,
11
necessarily “loose,” and may consist of an outside multipage, untabbed folded
12
piece with an envelope and/or other loose pieces inserted into the centerfold,
13
as in Moeller cross-exam
14
have any cost data or cost study to ascertain whether such pieces cost more
15
than ordinary enveloped letters. a’ In the absence of any such study or data,
16
to be conservative I treat these pieces as if they had the same cost as all other
17
letter-shaped mail, and adjust the cost proportionately.
18
estimate
19
cost of letters, or $14,021,103, which is the cost that has to be shifted from
20
letters to flats. This adjustment is shown in row 14, columns 2 and 4.
39
they could not be mailed
the cost
with a DAL).
exhibit VP/CW-CXE-1.
That is, they are
The Postal Service does not
Accordingly, I
of these misclassified pieces as 1.588 percent of the total
Response to AAPSAJSPS-T28-1 (Tr. 4/1157).
A-9
Revised 7/17/00
1
cost relationship
2
relationship
3
order to be conservative (from a ratemaking perspective), I would suggest
4
that the study should endeavor to focus on mai1 with the highest weight-
5
related cost, which is the least presorted mail within the subclass; i.e., the
6
Basic category for ECR and Regular Presort. The pound rate for the subclass
7
should reflect all weight-related
8
reflect both weight-related
9
appropriate (the destination entry discounts do this; the presort discounts do
10
11
12
13
should the study seek to estimate if only one weight-cost
is to be estimated for each subclass of Standard A Mail? In
costs, and the discount structure should
and piece-related cost avoidance wherever
not).
A second implication
~~~~~~
is that any study which ~~~~,~~~~,~~
tallies from the least preso*d
mail ~~~~~~~~~~~~~~~~~~~
mail to the most presorted
is likely to yield a resdt
14
that, at best, is useless and, at worst, is hopelessly confused and even
15
misleading.
16
document how weight affects mail processing costs would appear to be fatally
17
flawed from the outset, at least until IOCS tallies can distinguish
18
condition.
19
!I’his is one reason why any attempt to use IOCS tallies to
presort
Witness Moeller has previously observed that a properly-designed
20
study must control for variations “in the amount of drop shipping,
21
presortation, average haul of non-dropshipped mail, and other factors, all of
B-6
Revised 7l17iOO
1
Again, if direct piece handling tallies are used to distribute mixed mail
2
tallies to weight increment, and if those direct piece-handling
3
little relationship
4
underlying
5
that must be moved manually through the facility, and the additional
6
such movement that is caused by more weight and cube. To repeat, the
7
systematic bias is to understate the effect of weight on cost. For Standard A
8
9
tallies show
between weight and cost, their use will mask the
causal relationship between weight, the number of containers
cost of
ECR MaiI, ,1.5 percent of aII maiI processing taIlies were for ~~~~~~~~~~~
mail, and only 28.5 percent were single piece tallies.”
Inappropriate
10
distribution
of mixed mail tallies to weight increment is yet another reason
11
why the IOCS approach to a study of the weight-cost relationship
12
fundamentally
is
flawed.63
13
The discussion of this hypothetical example is intended to demonstrate
14
that weight affects costs in large measure via bulk operations, which include
15
all operations that entail moving mail around and through the facility, and
16
probably less so through individual
piece handling operations.64 The
62
Response to VP-CWAJSPS-T28-24 (Tr. 4/1342-44). IvExed mail
tallies represented 22.3 percent of city carrier in-office tallies.
53
See USPS-T17, pp, 12-17, for more detail and discussion on how
the Postal Service CFtA methodology uses direct tallies to distribute mixed
mail tallies and not handling tallies to the classes and subclasses of mail.
64
If direct tallies of individual piece-handling are not an
appropriate basis for distributing the costs of other functions to weight
increment, then the number of direct tallies is of little immediate
consequence to accuracy of the results. In others words, doubling or even
(continued...)
B-14